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Saturday, October 5, 2013

Business Models: The Forgotten Tool In M&A Integration



As a Partner at Deloitte I spent a lot time working with clients on M&A integration – particularly integrating organization structures and the people in them.  Over the last decade I have focused more on using Innovation methods to transform organizations from the customer point of view – transformation from the outside in.

It recently struck me that these two disciplines should be introduced to each other.  M&A is known to suffer huge failure rates – touted as high as 70%.  The leading cause of M&A failure is generally described as the inability to integrate people – often discussed under the squishy term “culture.”

I’ve experienced M&A failure and since I worked on the people side the big finger often pointed at me.  Based on feedback my teams would huddle to review what we did and how we could make it better.  Should we tweak our assessment surveys?  Revamp our communications?  Build better training and information programs?  We got better, but it was difficult to become great.

My work on innovation has given me a new lens to look at M&A integration.  Business models.  What strikes me is that if M&A pros examined business models at all steps in the M&A cycle they would definitely improve their success rate.

Here’s an example.  Recently I spent several years advising an Asian technology company on how to use innovation techniques to smooth the post M&A integration of two organizations.  The history is a bit unique.  A decade earlier the acquiring organization had spun-off the other organization because it “didn’t fit.”  Ten years later the performance of the legacy organization had plateaued so they decided to revitalize themselves by buying back their sibling – who was now mature and producing record results.

Well, the misfit of 10 years ago still didn’t fit.  Sure, we can look at the integration mismatch through one of the traditional lenses of people, process, and technology, but what if we look at it as incompatible business models.  What can we learn?

What is a Business Model?
Firstly, we need to define the term “business model”.  There is lots of good research on this topic, which I don’t intend to capture here; however, I summarize business models into three critical questions?
  1. Who wants what we’re offering?
  2. How do we deliver our offering?
  3. How do we make money with our offering?

The first principle in assessing the compatibility of business models is to ask these questions in the order presented; yet, the M&A targeting and diligence phases are over focused on the last question.  Asking the last question first does not produce value; it produces money – usually through synergies in the cost structure.  Not altogether a bad thing, but not a clear path to successful merger integration.

If the criteria for M&A success are value creation and operational effectiveness then you need to attend to questions #1 and #2; and you need to emphasize these during targeting and diligence, not just during integration.

Who Wants Our Offering?
Question #1 is about the “customer value proposition.”  It’s about the preferences of those who want your offer and the sustainable difference that it provides.  Lots of companies sell washing machines in Best Buy’s sea of white.  But why do people buy them?  Sure, some are transactional-churn customers who are looking for the lowest price; but others are looking for a more emotional connection with the appliance and its manufacturers.  They want to be customers for life.

Often acquisition targets are entertained to increase the customer pool.  Really?  If the customer value proposition of the merging organizations isn’t supported by similar customer philosophies then you risk draining the customer pool.  If the acquiring company’s focus is on serving customers through cost structure efficiencies it will crush customers who are looking for an intimate and innovative connection to a product or service.

For instance in 1994 Quaker Oats purchased Snapple for $1.7 billion and sold it three years later for a loss of $1.4 billion.  One reason for this failure was different answers to our question #1.  Quaker had an extremely focussed, mass-market working approach aimed at the end consumer while Snapple's style was eccentric, commercial and tilted towards its distributors.

How Do We Deliver Our Offering?
Question #2 poses similar opportunities and risks for merger integration.  How compatible are the delivery value chains?  How do we: design, produce, distribute, and service our offering?  Where are we on the globalization and outsourcing scales?  GE, for one, has recently realized that separating design from production depletes opportunities for innovation through synergy.  Do the merging organizations think about off-shoring the same way?

Operating infrastructures are often seen as a prime reason for an M&A: “Let’s downsize and integrate: 1+1=3.”  Not so fast!  Delivery systems are complex organisms.  They have their own lives.  Don’t check this box too quickly. 

An example is the decade long ill fated marriage of Daimler Chrysler.  By the 1998 announcement Chrysler led the industry in its innovative short cycle of “concept to showroom.”  This core competence wasn’t good enough for Daimler’s cost saving, consolidation mindset – the Daimler way was the only way.  This wasn’t the single reason for failure but it contributed to Chrysler’s divestiture in 2007.

Conclusion
It seems to me that M&A practitioners have neglected business models and rushed to “value creation” through “synergies in integrating infrastructures” (otherwise known as consolidating facilities and channels to downsize the workforce).  Business model analysis exposes real value.  It shows complementarity of value and exposes the risk of filling value gaps that should not be filled.

M&A decisions are made in an intense, pressure filled environment.  Could business model analysis be an effective conduit for complex M&A information to business people?  Maybe these models are a missing link in the quest for M&A success.


Monday, May 13, 2013

Technology & It’s Disempowering Power


I don’t regard myself as a troglodyte, but more often than not I am now the oldest person in the room.  That means I see value through the eye of experience before the lens of progress.

I’m getting disturbed by technology, not as a 19th century Luddite destroying the advance of machines, but as a humanitarian who wonders about the impact of technology on people in organizations and their ability to serve their clients and society.  Technology is becoming a barrier to humans working for humans.

It is clear to me, and everyone else who has been conscious for the last ½ century, that technology has advanced the human condition.  But trees don’t grow to the sky; have we hit the point of diminishing returns.  Let me explain.

I travel way too much, so many of my metaphors come from the traveler’s world.  A week ago I phoned my friends at the American Airlines Executive Platinum desk.  They’re the best.  They’re the most experienced agents trained to serve the airlines most experienced travelers.

Here’s what happened.  My wife and I were travelling to Canada from the US on the AA reward program.  We had the opportunity to move our travel up one day.  There is no change fee for me on this transaction so I called the Platinum desk.  Everything was ok, except because I was traveling to Canada and the exchange rate on the dollar had changed it was costing me 20 cents extra per ticket to cover landing fees.  Yep, 40 cents for both tickets – and the agent could not over-ride the system – she had to get approval from the rate desk.  This was a total disempowerment of her ability to act in the interest of her client and her company.

I see this all the time in organizations when I’m working on the inside as a consultant or on the outside as a customer.  Technology has taken away the flexibility for employees to act on good judgment.  The organizations need for consistency, efficiency, and low risk has emasculated the human’s need for empowerment, effectiveness, and respect.  What does that tell you about our basic belief about the value of people at work?

At what point does this emasculation lead to gutted enthusiasm?  Is disempowerment by technology a reason for such low employee engagement in today’s organizations?  When do people simply become automatons struggling to serve high order bits and bytes?

This wouldn’t concern me if humans were only mechanical, but they’re not.  The essence of humanity is emotion.  Human gratification comes from giving.  Employees get gratification by giving to customers – and we’re taking this away from them as their emotions are eroded by electrons.

Innovation is heralded today as the panacea for success.  Really?  In a world where many people are asked not to think how can Innovation flower?  Where will employees find fresh thinking at work when they’re asked to hang up their coat and minds at the door?

Tuesday, April 9, 2013

Ron Johnson – Questions about Innovation & Change


Did the Apple fall too far from the tree?

I live in Dallas.  My personal case study for the past two years has been Ron Johnson as the CEO of JC Penny.  The business section of the local paper tells me that my study is over.  Johnson has been fired.  His style, innovations, and vision of change managed to drive the stock from $35 to $15.  Oooops!

Most people know Ron Johnson as the genius behind the Apple Genius Bar.  He’s the guy that changed the face of retail.  He gave us wide-open spaces, a place for kids to play, and chest high tables to play with our tablets.  I’ve been to his flagship stores in New York City and London, not as a customer but as a tourist. 

Ron Johnson has gravitas.  So when he took over JC Penny in June 2011 I bought a front row seat.  I’m a change and innovation practitioner.  I wanted to learn at the foot of the master.  Closing out 2011 everything looked good.  Johnson announced: 

  • his vision to make JC Penny “America’s favorite store;” 
  • new people he wanted on the bus; 
  • “fair and square” pricing supported by a new logo dominated by a “square” – no more confusing coupons and complex pricing, just everyday low prices and value; and 
  • shift from a promotional department store to boutique stores within the store.

It didn't work.  What was left of JC Penny’s loyal customer base abandoned the store in droves.

I don’t know Ron Johnson.  I’m not his apologist.  But what did he do wrong?  Why did he fail?  Didn’t Johnson do all the things that change managers and innovators implore of their clients? 

  • Set a vision, commit to it, and get in front of it 
  • Change out the old executives with their defense of legacy
  • Challenge orthodoxies like coupons, discount pricing, and spiff’s 
  • Know the unarticulated needs of customers – like Apple has done so well

All of this advice resulted in failure, but I can only find two rationalizations for why it didn’t work: 

  1. Change is a journey – even in an exponentially changing world.  The impatience of the Board for shareholder returns trumped this needed transformation
  2. Test and learn – the innovators mantra.  Johnson seems to have pushed ahead with the arrogant leaders mantra of “got-a-hunch, bet-a-bunch”

But is this the full explanation?  Maybe there is a part of the real world that says that organizations, like natural species, have a shelf life.  Maybe the world just moves past the installed base of business.  Maybe death is natural, and should be accepted.


When we study success we ascribe it to the actions we want to observe.  When we study failure we do so to make the point that the leader didn’t follow the certified game plan.  That’s not the Ron Johnson case, from what I understand.   

Can we, as change agents and innovators, learn from JC Penny, or are we afraid to?

Monday, April 8, 2013

Change Management: Does Compromise = Failure?


Compromising Dreams
I hate it when I hear people say that 70% of change efforts fail.  First I think the number is urban legend espoused by people who don’t realize the damage this statement does to our profession.  How many financial advisors would you hire with a 70% failure rate.

Sure, I understand the marketing gravitas.  We’re trying to create pain within potential clients.  We’re trying to say: “you're entering dangerous seas.  Most change efforts fail so you need an experienced guide – like me.”  Well, since we’ve been saying this for about 20 years don’t you think clients will inevitably conclude that our “profession” is really a shell game?

Do we really fail 70% of the time?  I know that I’ve worked on dozens of change initiatives and I would say my success rate is close to 100%.  Similarly I have polled many consultants & corporate change practitioners about how often they fail – their experience is close to mine.

So what’s going on here?  Do I only have access to successful change agents?  I think not.  In fact, I have access to experienced practitioners who claim that: “given the circumstances we were as successful as we could be.”  Is this a rationalization or a confession?

Fundamentally I think that practitioners are saying: “… we advise our clients on what to do; then we compromise within their real world realities.”  Is it compromise that is causing failure that we choose not to see?  I think so and here are three common compromises.

Scope:  
Often the change aspiration is inspiring but when it’s broken down into near term tasks we’re asked not to disturb sacred organizational silos or protected customer classes – the very hot spots where the change should have the biggest impact.

Timing:  
Everyone knows that change is a journey within an exponentially changing world.  We want near term results, quick wins.  When the low hanging fruit is harvested the exasperated sigh is: “is that all there is?  We knew that!”

Resources:  
How often does the organization devote the best and brightest to the change effort?  Rarely; these people are needed in the business to get real results.  Similarly, how often does change get it’s own, needed funding?  Again, rarely; usually change is expected to be self-funding through re-purposing of resources.

I believe that every time we make a small compromise decision we foreshadow our failure.  Each of these decisions makes us less accountable for the result.  In the end we can claim that we colored within the lines.  That seems to be our definition of success.

Wednesday, March 20, 2013

Innovation & Organization Renewal

Change from Within

Innovation has been democratized.  It is now like air – we all know what it is, but we don’t know what it is.  I used to like the Economist’s definition of Innovation: “fresh thinking that customers value;” however, now I think that the empirical definition is that Innovation = Idea. We now beseech everyone in or organizations to offer ideas. We want ideas from everyone, everywhere so we can find:
  • Game changers in White Space, Blue Oceans, and Black Swans
  • Market changers for current products, new products, and extensions
  • Work changers in management systems and operational processes

This explosion in Innovation is clearly aimed at growth, profits, and shareholder returns.  But is it doing anything for our organizations?  Does it make organization life better for employees and increase organization value for our customers?  I doubt it.

The malaise in our organizations today is plummeting employee engagement and stalling customer loyalty.  Yet, dozens of correlation studies say the same thing: when organizations are healthy they perform best.  Can we use Innovation to break the death spiral of organization malaise and get us onto the virtuous cycle of: employee engagement-> customer loyalty->organizational performance.  I think so.

If the Innovation revolution can be anything we want it to be, then let’s make it a lever for organization renewal.  Let’s take the natural human drive for creativity and use it to unleash the power of employee ideas for the benefit of our customers.  Let’s use Innovation to build healthy organizations to put us on the road to profits; rather than using Innovation to search for profits on the backs of our failing organizations.

How do we do this?  Simple.  We need two things:
  1. Tolerant Leaders – those who know how to listen, ask questions, and accept that failure is integral to success, and
  2. Trained Employees – those who understand their customers and know they have permission to challenge “the way we do things around here.”

Employees don’t work for their companies any more; they work for their customers.  The power of ideas is a way to strengthen this relationship.